Question

What is Leontief’s Paradox? How was Leontief’s Paradox resolved?

Answer 1

Leontief Paradox is named after the economist, Wassily Leontief who was widely known for Input-output analysis. This input-output method of analysis is used in economics by a large number of industrialized countries for both forecasting and planning.

A country’s exports show the commodity which is most abundant in that country that is labour or capital. As per Leontief, though the capital in United States is more than many other nations, most of its exports were of labour-intensive goods. On the other hand, most of the imports of US were of capital-intensive goods. This was known as the famous Leontief Paradox.

So it basically means that a country with higher capital per worker has a lower ratio of capital to labor in exports than in imports.

Leontief gave a resolution for his own paradox and said that the workers in the US may be more efficient than those in other countries. According to his study, U.S. workers were three times more efficient than foreign workers.

This increase in the effectiveness of the American workers was not due to a higher capital-labor ratio, as we assume that countries have similar technology and also the capital- labor ratio.

Some explanations for this contradiction put away the meaning of comparative advantage as a determinant of trade. As a matter of fact, the Linder hypothesis says that demand plays a very important part in comparative advantage as a determinant of trade with the countries sharing similar demands having more chances to trade. The New Trade Theory (NTT) argues that the comparative advantages can develop individually from the factor endowment variation.